Why Venture-Backed Startups Shouldn’t Take SBA Loans
If you’re not shut out of the credit markets, leave it for those who really need it.
There has been a lot of discussion about whether startups qualify for forgivable loans under the Paycheck Protection Program (part of the CARES Act) administered by the U.S. Small Business Administration. I don’t want to rehash the arcana of affiliation rules here. Instead, I’ll make a totally different point: There is a money grab going on right now by some venture-backed startups that this program absolutely should exclude.
Let me start by writing about the kind of business I believe this program is spot-on for: the local construction company that has to stop all projects, or the barbershop that has zero business right now. These businesses tend to be low margin and operate on very little cash (maybe two to four weeks’ worth). Their revenues have gone to zero. They don’t have equity investors and are largely shut out from the credit markets. Their only alternative is bankruptcy.
By contrast, many venture-backed companies have many months or maybe even more than a year of burn sitting in their bank accounts. Their investors are often deep-pocketed funds that should be well reserved for follow-on investments. They can get sophisticated financial advice and access…
